A perfect storm has hit the world markets and has inspired uncertainty among global investors. Uncertainty has never been a good potion for the markets, with volatility the clear symptom, as a result.
The last time markets experienced such volatility was in 2008, where the trigger factor was financial deregulation in the US. This time, it is a health crisis. COVID-19 (the disease caused by the new coronavirus) was first detected in late 2019 in Wuhan, China, but it has now spread across all continents of the world. There are now over 1.4 million positive cases reported, while over 80,000 lives have been claimed by the disease. There is no clear peak period that has been defined, and investors are increasingly getting anxious.
The world over, markets have been unpredictable, to say the least. In the US (now clearly the epicentre of the disease), markets have already plunged a great deal. Both the S&P 500 and the Dow have tumbled over 20% during Q1 2020 as investors continue to grasp the extent into which COVID-19 has dented the economy. Last months saw the top indices print high three-digit losses on multiple consecutive dates, including the steepest single-day fall in the markets since the 1987 October stock market crash.
The final hammer fell when it was reported that over 7 million Americans are out of employment. Still, investors have shown an appetite for taking on risk in these depressing times. When Q2 2020 kicked in, there has been a slight jump in both the S&P 500 and the Dow as mildly encouraging numbers from Europe showed a flattening curve in death rates and new positive cases. There is no major health breakthrough yet, but such is the hope investors have that they are willing to take advantage of any piece of positive data and to try out risk-on trading strategies.
The Impact in Europe
In Europe, Q1 2020 saw equities post the worst performance since 2002. Spain’s IBEX 35 and Italy’s FTSE MIB have tumbled 28.94% and 27.46% respectively, representing the biggest losses in Europe’s worst-hit countries during the pandemic. France’s CAC 40, Britain’s FTSE 100 and Germany’s DAX index all shed over 25% during Q1 2020 as well. A reprieve only came at the turn of Q2 2020 when marginal positive data started to hit the headlines.
The Asian Markets
In Asia, where COVID-19 was first detected, markets have had a rollercoaster ride. China first reported about a rare disease to the WHO (World Health Organisation) at the turn of the year, but investors were initially slow to react. However, after the Shanghai Stock Exchange extended its reopening to February 3rd, after closing for the Lunar New Year on January 26th, investors’ worry started to drag the benchmark SSE Composite index to close more than 7.7% lower on the first day of trading. However, Chinese markets later recovered to end the month close to 5% higher. In Japan, markets had a relatively stable start to the year, but they ended the quarter 17.5% lower, with the Japanese yen (JPY) experiencing extreme volatility throughout.
Governments throughout the world have responded to the COVID-19 threat by implementing various lockdown and social distancing measures. The hope is to flatten the curve, but whether success is achieved or not, investors are now concerned about how long it would take for normal economic activity to resume. The fact that no one can provide a definitive timeline further inspires uncertainty.
Although the biggest risk driver, the COVID-19 health risk has not been the only headline inspiration for volatility in the market. March Q1 2020 saw the literal collapse of the OPEC+ alliance as Saudi Arabia and Russia parted company and kick-started a fierce price war that ensured oil prices tumbled by over 30% by the end of the quarter. A truce between the two major producers cannot be ruled out, but it may well be hollow with the world amid a COVID-19-inspired weak Oil demand.
The uncertainty in the markets has no clear end in sight, but investor appetite for risk has not faded. The spiky tumbles are evidence of panic selling, but there have also been cautious aggressive moves that have seen dips remain in attractive bid territory. Overall, the market conditions at the moment favour short term strategies over long-term ones. It’s a sick market and protection is not yet in sight!